To get to know the so-called DEX, nothing better than starting with Uniswap. Here we tell you its history and characteristics.
Decentralized exchanges are becoming increasingly important; We introduce you to one of the best known.
Uniswap, the key data about this DEX:
- This decentralized exchange (DEX) was conceived by Hayden Adams.
- The first version of Uniswap came out in 2017.
- Uniswap makes automated trading easy.
- It works as a DEX within the Ethereum ecosystem, and as an automated liquidity protocol (Automated Market Maker or AMM).
- UNI is the Uniswap token.
What is Uniswap?
It is a decentralized exchange(DEX) that facilitates automated transactions between cryptocurrencies such as ether, Maker, DAI , USD Coin, BAT, etc. on the Ethereum blockchain, which it achieves through the use of smart contracts. In addition, it provides other features for DeFi users on Ethereum, such as price oracles and flash swaps. Uniswap also launched its token, called UNI, with which it seeks to boost growth and interest in this platform.
In November 2017, the former Siemens employee designed a proof of concept for Uniswap, which included a Smart Contract that contained a single liquidity provider and authorized a simple transaction. At this time, Adams also launched the Uniswap website.
The first Uniswap demo took place on November 3, 2017 during Devcon (an event that brings together people interested in the Ethereum ecosystem). At the end of January 2018, several bugs in the Uniswap code were fixed, and two months later, a full demo version became available.
In April 2018, during an Deconomy forum (a global forum that promotes the development of the distributed economy), Adams met Vitalik Buterin, who suggested that he write his smart contract in Vyper (a programming language based on Python, and oriented to Smart Contracts, which works on the Ethereum Virtual Machine; EVM); he also recommended that she apply for funding from the Ethereum Foundation.
At the end of July 2018, once Adams managed to complete five main points of the project ( White Paper; easy-to-use interface for traders; smart contracts finalized and ready to trade; developer documents; and a security audit of Smart Contracts) , the Ethereum Foundation provided Uniswap with funding of $50,000.
During the Devcon 4 event, held in November 2018, Uniswap V1 was released, which was already accessible to the general public. This version deployed smart contracts on the Ethereum mainnet, as well as on the uniswap.io and app.uniswap.org sites.
UniSwap V2 was released in May 2020. In this version, instead of relying on ether (ETH) as an intermediary, any ERC-20 token was allowed to be traded. This V2 edition had its most relevant update with the launch of the UNI governance token.
12 months later (May 2021) Uniswap V3 appears, incorporating new features such as concentrated liquidity, multiple fee tiers, and the ability to generate non-fungible tokens(NFTs).
As can be seen, Uniswap has registered a constant evolution and development until it currently becomes one of the largest DeFi systems (Decentralized Finance; decentralized finance).
How does Uniswap Work?
Uniswap functions as an Automated Market Maker(AMM), which allows users to build markets that third parties can benefit from. The creation of these markets allows the protocol to generate income, which serves to encourage the injection of liquidity in exchange for a small interest for investors.
Pools are the areas where investors inject tokens to increase liquidity; and as a pool is used by third parties, the transactions carried out generate commissions that are used to maintain the protocol and give rewards to investors in said pool.
The creation of these pools allows the protocol to generate liquidity to accept the rapid exchange of assets. This exchange system is controlled by Smart Contracts, giving rise to its decentralized functionalities.
Liquidity pools are the heart of Uniswap. The creation and management of these are what allow the DEX to provide all its services. Also, this attracts investors to Uniswap, since there is the promise of a return on your capital. Each token in a Liquidity Pool is an opportunity for investors to earn rewards. This is possible thanks to the fact that their tokens are used to carry out exchanges and other operations that generate commissions within Uniswap. To the extent that a pool has a lot of use, higher profits will be obtained (since they are generated based on its liquidity).
The formulation of the total liquidity of the fund is controlled by an economic mechanism known as Constant Product Market Maker (CPMM), which ensures the balance between ETH and the different ERC-20 tokens. CPMM is used in Uniswap V1 and V2.
Oracles also have an important role within Uniswap , since information about the price of tokens that are on their platform is needed. This function is controlled by Time Weighted Average Price (TWAP) oracles. This type of oracle can offer information about the various tokens within Uniswap, and in this way feed the system to recognize and configure prices in the protocol.
The function of the oracles is very important because the commission and reward system of the Uniswap protocol depends on it.
Pool Token Generation
Every time new tokens are contributed to a Uniswap liquidity pool, the contributor receives a pool token, which is also an ERC-20 token. Within this DEX, the pool token is the means by which liquidity providers receive their rewards.
Token pools are created each time funds are deposited into the liquidity pool. The token pools can be freely exchanged, moved and used in other DApps (Decentralized Applications; decentralized applications). When the funds are recovered, the pool tokens are burned or destroyed. Each pool token represents the user’s share of the pool’s total assets, and the 0.3% commission share (percentage per pool trade).
Uni, The Uniswap Token
The key features of UNI are:
- It was born from a specific need: to allow its users to earn tokens by injecting liquidity into the protocol.
- It is an ERC-20 token on the Ethereum blockchain, which offers control over governance on Uniswap.
- UNI’s primary role is governance management on Uniswap, as well as administration of funds in the governance treasury.
- To acquire UNI, you can use various exchanges, such as Binance and Coinbase.
How To Make A Trade On Uniswap?
Through Uniswap, you can buy ether (ETH) and any of the ERC-20 tokens that the Ethereum blockchain supports. To carry out the operation, you must have a balance of ETHs to pay the transaction fees, as well as to exchange for the desired ERC-20 token (it can be ETH or another ERC-20 token).
For example, if you want to exchange USD Coin(USDC) for UNI, you will need to have USDC in your wallet plus some ether to cover the transaction fee.
Steps to make a transaction on Uniswap (to acquire some UNI tokens with ETH):
- Step 1: go to the Uniswap desktop version page. At the top right, click on the “Connect wallet” button and log in with the wallet you want to trade with, for example MetaMask, WalletConnect, Coinbase Wallet, Fort Matic, Portis Wallet, etc.
- Step 2 – Once logged in, the trading interface will appear. You must select the crypto assets with which you want to operate.
- Step 3: select the amount you want to invest.
- Step 4: at the bottom of the “Orders” menu, you will see the amount that can be received. If you do not agree with these figures, you should click the “Change” button.
By clicking on the portfolio, you will be asked to confirm the operation and to adjust the commissions to the most convenient figure. When everything is ready, the transaction is validated and processed.
Once the operation is completed, the ERC-20 tokens that have just been acquired will appear in the wallet.
Advantages of Uniswap
- The system is decentralized.
- Access to the platform can be done using any crypto wallet and allows you to build custom applications.
- Ability to create an exchange for any ERC-20 token.
- You do not have to be a trader to participate.
- Liquidity pools offer good profit levels for your providers
Disadvantages of Uniswap
- Trading tokens requires some knowledge of crypto wallets and transactions.
- The platform gas rate is high.
- Flash exchanges: Malicious users can take advantage of imbalances between different markets.
- It is relatively easy to create fake versions of tokens.